Pay and Productivity

On Labor Day weekend in 2012 labor’s share of national income is lower than it has been since World War II, and there is a widening gap between growth in output per hour and labor compensation. There is no doubt that technological change and globalization have contributed to these trends. The clearest path to mitigating these trends is better education and training programs to prepare workers for a highly competitive and dynamic global labor market.

Worker productivity is a key factor in determining pay. In a competitive economy a worker’s wage equals the additional revenue generated by one more unit of labor services. A worker who costs twice as much as another must be twice as productive, at the margin, in order to keep his/her job. The key is worker productivity at the margin, which is difficult to measure. The Bureau of Labor Statistics (BLS) reports average output per hour (which is higher than marginal output per hour) and has shown that wages and average productivity have diverged over the past two decades.

This week the BLS released productivity data for detailed retail trade industries in 2011. Two of the industry leaders in productivity gains between 2010 and 2011 were book stores and florists. Output per hour worked increased by 13.4% in book stores and by 20.6% in florists from 2010 to 2011. A naïve interpretation of these data would lead to the prediction that wages should rise sharply for employees of book stores and florists.

Productivity in book stores and florists has risen because management has developed methods to sell more with fewer employees. Employment in book stores is less than half of what it was in 2003 and employment in florists is down 43% since 2003. The worker productivity gains at these retailers are unlikely to be the result of more productive and skilled employees, but instead due to efficiency gains. The revenue generated by an additional hour of a worker’s time may well be about the same as it was a decade ago, with fewer workers in the store. In this situation an increase in average worker productivity per hour doesn’t translate into wage gains.

Technological change and globalization have weakened the demand for labor in goods producing industries for decades. Over the past decade gains in information technology have weakened demand for workers in the service and retail sectors as well. These trends present a challenge for the labor movement in the U.S. on this Labor Day weekend.